Volcker Rule Delay and Simplification Gains Support in Congress

A bipartisan group of U.S. lawmakers is backing a delay in finalizing a ban on proprietary trading by banks without urging regulators to ease the rule.

Six senators introduced legislation yesterday that would postpone implementation of the so-called Volcker rule from the July 21 deadline set by the Dodd-Frank Act and align it with regulators’ completion of detailed rules for the trading ban. Meanwhile, Representative Barney Frank, the Massachusetts Democrat who co-authored the law that requires regulators to impose the ban, released a statement urging banking agencies to complete a simplified version by Sept. 3.

Executives from Morgan Stanley, JPMorgan Chase & Co. and other financial firms have criticized the initial draft of the Volcker rule as too complex. While Frank’s comments and the Senate legislation could give the regulators more time to decide whether the final rule should be scaled back, the efforts on Capitol Hill don’t require the agencies to blunt the measure.

“It’s just a delay,” said Brian Gardner, the senior vice president for Washington research at KBW Inc. “It’s just a timing issue.”

Still, a delay will give the financial industry more time to make its case to regulators. Kenneth Bentsen, the executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association, said in a statement that he was pleased with the Senate proposal.

‘Thoughtful’ Bipartisanship

“This is a thoughtful bipartisan recognition of the risks associated with rushing to impose the Volcker rule in such a way that would impede market-making and reduce liquidity and depth from our capital markets,” he said.

SIFMA is a Washington-based trade group of banks and securities firms.

The Senate legislation was proposed by Democrats Mark Warner of Virginia, Kay Hagan of North Carolina and Tom Carper of Delaware, along with Republicans Mike Crapo of Idaho, Pat Toomey of Pennsylvania and Bob Corker of Tennessee.

“By linking the effective date to the regulators completing their work, Congress will not be arbitrarily extending the implementation of Dodd-Frank, and financial institutions and markets will be able to comply with final rules rather than being forced to guess what those regulations might be,” the six senators said in a statement yesterday.

In his statement, Frank said regulators should release guidance by July 21 and agree to a “simplified” final rule by Labor Day, which is Sept. 3 this year.

‘Too Complex’

“The agencies tried to accommodate a variety of views on implementation but the results reflected in the proposed rule are far too complex and the final rules should be simplified significantly,” Frank said in the statement.

The current proposal would allow banks to conduct proprietary trading that is tied to market-making activities or hedging risk. Those exemptions have been criticized for adding to the complexity that would make implementing the ban difficult.

Federal Reserve Chairman Ben S. Bernanke and other regulators have told lawmakers in congressional testimony that the interagency rule may not be completed by the deadline set in Dodd-Frank, the financial-rules overhaul enacted in July 2010.

Lawmakers and regulators are considering action on the timeline for the Volcker rule at the request of the banking industry, which raised concerns about whether and how to comply with the statute that, according to law, takes effect on July 21 with or without a final rule.

Potential Disruption

“Without such legislative or regulatory action, there is a potential for tremendous disruption to the securitization markets well before July 21, 2012 that may ultimately reduce critical credit availability to consumers, municipalities and small, medium and large businesses around the United States,” Tom Deutsch, executive director of the American Securitization Forum, said in letter to regulators this week.

The bipartisan work on providing clarity is necessary, even after assurances from Bernanke last month that regulators would not enforce the law if the rule was not in place, said Karen Shaw Petrou, co-founder and managing partner at Washington-based Federal Financial Analytics Inc., a regulatory consulting firm.

“I can understand why their lawyers would find this situation a little uncomfortable,” Petrou said.

Testifying before the Senate Banking Committee yesterday, Federal Reserve Governor Daniel Tarullo said that because of concerns from the financial industry and lawmakers, “we probably need to provide some clarification.”

The rule is named for Paul Volcker, former Fed chairman and economic adviser to President Barack Obama. In remarks in New York on March 21, Volcker said that “strong resistance to the principles involved by affected institutions, each with deep pockets and phalanxes of lobbyists, shouldn’t be surprising.”


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